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Posted on Jul 29, 2024

2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem Solving and

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2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem Solving and Critical Thinking Skills $20,000 2.00% 1) buy house in all Cash Or Mortgage; project period - 15 years 2) property value $200,000 3) down payment $50,000 4) 10-yr mortgage at 3.5% ($18,036) 5) Rent-to-Price Ratio 10% 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income case 1: Investment CF1 CF2 CF3 CF4 CF5 CF6 CF7 CF8 CF9 CF10 CF11 CF12 CF13 CF14 CF15 NPV = IRR= CFO (NO inflation, rental property value appreciation) XXXXX XXXXX -50,000 XXXXX XXXXX -200,000 1,964 1,964 1,964 20,000 20,000 1,964 20,000 1,964 20,000 XXXXX 20,000 XXXXX 20,000 XXXXX 20.000 XXXXX 20,000 XXXXX 20,000 20,000 XXXXX XXXXX XXXXX 20,000 20,000 20,000 20,000 20,000 220,000 20,000 Q#1 Use IRR to comapare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not eaten away by mortgage cost, hence Cash better than Mortgage? Q#2 At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with IRR? How about required rate 4%, required rate 3.5%, required rate 3%, etc., discuss your finding. 1,964 XXXXX XXXXX () (WITH inflation, rental property valve appreciation) XXXXX -50,000 2,364 2,772 XXXXX -200,000 20,000 20,400 20,808 growing rental=> 20,000 20,400 20,808 XXXXX XXXXX XXXXX XXXXX XXXXX 24,380 24,867 25,365 XXXXX XXXXX 21,224 21,649 22,082 22.523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 295,563 21,224 21,649 22,082 22,523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 26,390 Q#3 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". case 2: Ownership 0 XXXXX XXXXX -50,000 (18,036) (18,036) -200,000 0 0 (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) 0 0 0 0 0 0 0 0 0 0 200,000 0 200,000 0 0 0 0 0 Q#4 You buy the house just for self-use. What's your conclusion now based on IRR, explain. Q#5 Now go back to case 1, think about areas with lower Rent-to-Price Ratio, such as San Fransisco, NYC. Try 5%, 3.5% and a even lower Rent-to-Price ratio, discuss your findings. Q#6 Discuss/digest/summarize your If-Then findings so far. Q#7 (optional) Summarize any additional insights you may have figured from this exercise (e.g., at a different inflation rate, you play with the Excel). 2. Apply capital budgeting to property investment (a) Develop proforma cash flows for property investment project (b) Compute NPV, IRR (c) Develop Problem Solving and Critical Thinking Skills $20,000 2.00% 1) buy house in all Cash Or Mortgage; project period - 15 years 2) property value $200,000 3) down payment $50,000 4) 10-yr mortgage at 3.5% ($18,036) 5) Rent-to-Price Ratio 10% 6) inflation, rental, property value appreciation 7) sell the property at the end of 15th year 8) annual rental income case 1: Investment CF1 CF2 CF3 CF4 CF5 CF6 CF7 CF8 CF9 CF10 CF11 CF12 CF13 CF14 CF15 NPV = IRR= CFO (NO inflation, rental property value appreciation) XXXXX XXXXX -50,000 XXXXX XXXXX -200,000 1,964 1,964 1,964 20,000 20,000 1,964 20,000 1,964 20,000 XXXXX 20,000 XXXXX 20,000 XXXXX 20.000 XXXXX 20,000 XXXXX 20,000 20,000 XXXXX XXXXX XXXXX 20,000 20,000 20,000 20,000 20,000 220,000 20,000 Q#1 Use IRR to comapare Cash vs Mortgage? With all cash buying, all the return of the property (from rental) is earned and not eaten away by mortgage cost, hence Cash better than Mortgage? Q#2 At required return 5%, find NPV to compare Cash vs Mortgage (mutually exclusive), conclusion consistent with IRR? How about required rate 4%, required rate 3.5%, required rate 3%, etc., discuss your finding. 1,964 XXXXX XXXXX () (WITH inflation, rental property valve appreciation) XXXXX -50,000 2,364 2,772 XXXXX -200,000 20,000 20,400 20,808 growing rental=> 20,000 20,400 20,808 XXXXX XXXXX XXXXX XXXXX XXXXX 24,380 24,867 25,365 XXXXX XXXXX 21,224 21,649 22,082 22.523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 295,563 21,224 21,649 22,082 22,523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 26,390 Q#3 Now assume rental grows with inflation, does your conclusion change? Use your numbers to find support for "Rental is a hedge against inflation". case 2: Ownership 0 XXXXX XXXXX -50,000 (18,036) (18,036) -200,000 0 0 (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) (18,036) 0 0 0 0 0 0 0 0 0 0 200,000 0 200,000 0 0 0 0 0 Q#4 You buy the house just for self-use. What's your conclusion now based on IRR, explain. Q#5 Now go back to case 1, think about areas with lower Rent-to-Price Ratio, such as San Fransisco, NYC. Try 5%, 3.5% and a even lower Rent-to-Price ratio, discuss your findings. Q#6 Discuss/digest/summarize your If-Then findings so far. Q#7 (optional) Summarize any additional insights you may have figured from this exercise (e.g., at a different inflation rate, you play with the Excel)